Bruce & Co.expects its EBIT to be $100,000 every year forever.The firm can borrow at 11 percent.Bruce currently has no debt,and its cost of equity is 18 percent.The tax rate is 31 percent.Bruce will borrow $61,000 and use the proceeds to repurchase shares.What will the WACC be after recapitalization?
A)16.30 percent
B)16.87 percent
C)17.15 percent
D)18.29 percent
E)18.86 percent

Question

Quizplus · Accepted Answer

V_U = $100,000(1 - 0.31)/0.18 = $383,333.33V_L = $383,333.33 + 0.31($61,000) = $402,243.33R_E = 0.18 + (0.18 - 0.11)($61,000/$402,243.33 - $61,000)(1 - 0.31) = 0.1886WACC = 0.1886($402,243.33 - $61,000)/$402,243.33 + 0.11($61,000/$402,243.33) (1 - 0.31) = 17.15 percent